Preliminary real estate contracts are the written agreements buyers and sellers sign before the deed actually changes hands. They come in three main forms: a short reservation agreement that holds a property off the market, a binding purchase agreement that commits both sides to close on agreed terms, and an installment land contract that lets a buyer take possession while paying the seller over time. Each one carries different legal weight, a different deposit structure, and different consequences if a party walks away.
Reservation Agreements
A reservation agreement is the lightest form of preliminary contract. You pay a fee to hold a property for a set window, typically fifteen to thirty days, during which the seller agrees not to entertain other offers. These show up most often in new construction, where units are sold before the building is finished.
The fee is usually a fixed dollar amount rather than a percentage of the price. If you go through with the purchase, it generally gets credited toward your down payment or closing costs. If you walk away, it is almost always non-refundable. That trade is the whole point: the seller takes the property off the market in exchange for compensation if you change your mind.
A reservation agreement does not transfer any ownership interest. It gives you a priority right to enter into a full purchase contract during the hold period. If the seller breaks the exclusivity and accepts another buyer’s offer, you have a breach of contract claim and can usually recover at least the reservation fee. Your actual remedy depends on the agreement’s terms and the law where the property sits.
Because these agreements are short-lived, they contain fewer terms than a full purchase contract. At a minimum, the document should identify both parties, describe the property, state the fee amount, specify the hold period, and spell out what happens to the money under each possible outcome.
Purchase and Sale Agreements
A purchase and sale agreement, sometimes called a promissory contract, goes much further. Both the buyer and the seller make a binding commitment to complete the sale on agreed terms at a future date. This is the standard document most people encounter when buying a home.
The buyer backs that commitment with an earnest money deposit, generally between 1% and 10% of the purchase price. The deposit goes into escrow with a neutral third party, usually a title company or attorney. Neither side can touch the money until the deal either closes or falls apart.
Where the money lands depends on who caused the collapse. If the buyer walks without a valid contractual reason, the seller can usually keep the earnest money as liquidated damages. If the seller breaches, the buyer gets the deposit back and may also pursue legal remedies.
Contingencies That Let You Walk
Most purchase agreements include contingency clauses that give the buyer specific exit ramps without forfeiting the deposit. These clauses are arguably the most important part of the document because they define the circumstances under which you can cancel and keep your money. The three most common are financing, inspection, and appraisal.
- A financing contingency gives you a specified window to obtain a mortgage commitment. If your loan application is denied despite a good-faith effort, you can cancel and recover the earnest money.
- An inspection contingency lets you hire a professional to evaluate the property’s condition. If the inspection reveals serious problems, you can negotiate repairs, request a price reduction, or cancel outright.
- An appraisal contingency protects you if a professional appraisal values the property below the purchase price. Most lenders will not finance more than the appraised value, so this clause lets you renegotiate or exit if the numbers do not line up.
If a contingency is not satisfied within the window the contract specifies, the deal can be canceled without penalty as long as both parties acted in good faith. The earnest money returns to the buyer. A contract with no contingencies, or with waived contingencies, leaves the buyer exposed if something goes wrong after signing.
Specific Performance and Lis Pendens
Real estate is treated as legally unique. No two parcels are identical, which means money alone may not make a wronged buyer whole. Courts can order a breaching seller to go through with the sale rather than simply pay damages. To obtain this remedy, you generally need to show that the contract was valid, you were ready and able to close, and money damages would be inadequate.
A buyer suing to force a sale can also record a lis pendens in the property’s chain of title. A lis pendens is a public notice warning anyone who checks the records that litigation is pending over the property. It effectively freezes the seller’s ability to sell to someone else or borrow against the property while the case plays out.
Time-of-the-Essence Clauses
Some purchase agreements include a clause declaring that “time is of the essence.” The phrase carries real legal weight. It means missing a deadline is not just inconvenient but constitutes a material breach. If the agreement sets a closing date and includes this language, a party who fails to close on time can lose their rights under the contract entirely. Without this clause, courts in many jurisdictions treat deadlines as aspirational and give the late party a reasonable period to perform.
Installment Land Contracts
An installment land contract, sometimes called a contract for deed, is a seller-financed arrangement where the seller keeps legal title until the buyer finishes paying the full purchase price. The buyer takes possession and can live in or improve the property, but the deed does not transfer until the final installment clears. The Consumer Financial Protection Bureau describes these transactions as purchases made on an installment plan rather than through a traditional mortgage.1Consumer Financial Protection Bureau. What Is a Contract for Deed?
This structure appeals to buyers who cannot qualify for conventional financing and to sellers who want steady income from the property. It carries risks a standard mortgage does not. With a mortgage, a lender has to go through a formal foreclosure process before taking the home. With a contract for deed, the seller in many jurisdictions can move to evict the buyer much more quickly after a missed payment, and the buyer may forfeit every dollar paid up to that point.1Consumer Financial Protection Bureau. What Is a Contract for Deed?
Throughout the payment period, the seller remains the owner of record. The buyer holds what is known as equitable title, a recognized legal interest in the property that stops short of formal ownership. Once the final payment is verified, the seller is legally bound to execute and deliver the deed. If the seller refuses at that point, the buyer can sue for specific performance to compel the transfer.
The Interest Rate Floor
Seller-financed contracts must charge at least a minimum interest rate set by the IRS, or the IRS will impute one for tax purposes. Under federal tax law, if a sale contract does not include adequate stated interest, a portion of each payment gets reclassified as interest income to the seller regardless of what the contract says.2Office of the Law Revision Counsel. 26 U.S. Code 483 – Interest on Certain Deferred Payments
The minimum rate is the applicable federal rate published monthly by the IRS. As of April 2026, the long-term AFR used for most real estate transactions sits at 4.62% compounded annually.3Internal Revenue Service. Rev. Rul. 2026-7 Applicable Federal Rates A separate rule applies to land sales between family members: the discount rate cannot exceed 6% compounded semiannually, as long as total sales between the same individuals stay under $500,000 in a calendar year.2Office of the Law Revision Counsel. 26 U.S. Code 483 – Interest on Certain Deferred Payments State usury limits also apply and vary widely, so the contract rate needs to satisfy both the federal floor and the state ceiling.
What the Written Agreement Has to Include
Every preliminary real estate contract must be in writing to be enforceable. The Statute of Frauds, which exists in some form in every state, requires a signed written document for any agreement involving the sale of real property. An oral promise to sell you a house is worth nothing in court, no matter how many witnesses heard it.
The writing has to identify the subject matter clearly enough that a court could determine what was agreed to. At a minimum, an enforceable agreement needs:
- Full legal names and contact information for every buyer and seller.
- A property description, including the street address, legal description from county land records such as lot and block numbers or a parcel identification number, and any relevant survey data.
- The purchase price, how it will be paid, the deposit amount, and the schedule for any installments.
- A closing date for when the final deed will be executed and recorded.
- Every contingency that must be satisfied before the sale becomes final, with deadlines attached to each one.
- Signatures from all parties. Digital signatures qualify under federal law.
Sloppy drafting is where most contract disputes start. Every blank on a form should be filled in or marked as not applicable. Vague language about deposit refunds or unclear contingency deadlines invites expensive arguments later. If a term matters enough to discuss during negotiations, it matters enough to put in the contract.
Marketable Title
Every real estate purchase agreement carries an implied promise that the seller will deliver marketable title, meaning title free from competing ownership claims, undisclosed liens, or unresolved legal disputes. Before closing, the buyer should order a title search to verify that the seller actually owns what they are selling and that no surprises are lurking in the chain of title. Outstanding mortgages, tax liens, easements, and zoning violations can all make a title unmarketable.
If the search turns up problems, the buyer typically has a window to object and require the seller to cure the defect before closing. The length of that window depends on what the contract says. If the seller cannot deliver clean title by the deadline, the buyer can usually cancel and recover the full earnest money deposit.
Federal Disclosures Before You Sign
Federal law imposes disclosure duties that apply regardless of what state the property is in. The most significant is the lead-based paint disclosure for residential property built before 1978.
Before you become obligated under any purchase contract for pre-1978 housing, the seller must provide an EPA-approved lead hazard information pamphlet, disclose any known lead paint or lead hazards in the property, and share any available lead inspection reports. You also get at least ten days to hire an inspector to test for lead, unless both parties agree to a different timeline. The contract itself must include a signed lead warning statement confirming you received this information.4Office of the Law Revision Counsel. 42 U.S. Code 4852d – Disclosure of Lead-Based Paint Hazards “Target housing” under this law covers virtually all pre-1978 residences, with narrow exceptions for housing designated for the elderly or persons with disabilities and for zero-bedroom units, unless a child under six lives there or is expected to.5U.S. Environmental Protection Agency. What Is Target Housing?
Beyond lead paint, most states require sellers to disclose known material defects that could affect the property’s value. Specific requirements vary, but common required disclosures include structural problems, water damage, pest infestations, environmental hazards, and any history of major repairs. If a seller knowingly conceals a required disclosure, the buyer may be able to cancel the sale or hold the seller liable for damages after closing.
Signing, Notarizing, and Recording
A signed preliminary contract is enforceable between the parties as soon as both sides sign, provided the Statute of Frauds requirements are met. Notarization is a separate step. A contract does not need to be notarized to be valid between buyer and seller, but most county recording offices will not accept a document for recording unless it has been notarized. Notarization verifies the identity of the signers and confirms they signed voluntarily.
Recording the signed agreement with the county recorder or clerk creates constructive notice: anyone who later searches the public records will see that you have a claim on the property. This protects you against the seller trying to sell the same property to someone else or encumbering it with new liens after your contract is signed. Without recording, a later buyer who checks the records and finds nothing could potentially claim priority over your interest. Filing fees vary by jurisdiction but are typically modest.
Not every preliminary contract gets recorded. Reservation agreements are usually too short-lived to justify the cost. Standard purchase agreements are sometimes recorded if there is a long gap between signing and closing, or if the buyer has reason to worry about the seller’s reliability. Installment land contracts, on the other hand, should almost always be recorded, because the buyer will be making payments for years before receiving the deed.
Electronic Signatures
Federal law permits electronic signatures on real estate contracts. Under the ESIGN Act, a contract cannot be denied legal effect solely because it was signed electronically or because an electronic record was used in its formation.6Office of the Law Revision Counsel. 15 U.S. Code 7001 – General Rule of Validity The signer has to show clear intent to sign, and the platform should give each party a fully executed copy. The ESIGN Act covers most real estate transactions, but some states impose additional requirements for documents that will be recorded with the county, so check local rules before relying entirely on a digital signing platform for recordable documents.